An Ugly Way to Win in an Ugly Market

By Emily Flitter

THIS IS an ugly time to own shares of (ticker: LPX), the world’s largest maker of oriented strand board. The homebuilding industry, which has adopted OSB as a stronger and cheaper alternative to plywood, is in the toilet. The company’s shares, at $8.95, are near their 52-week low. And management is likely to suspend the 60-cent a year dividend, perhaps as soon as next month.

In other words, the stock looks like even a better buy now than it was when I wrote about it in early May, when it traded at $11.51 (“We Want To Own the Cement Mixer in the Demolition Derby”).

Louisiana-Pacific is the strongest player in a brutally cyclical business. From peak to trough, industry revenues have been cut in half. And last week Canada’s Ainsworth Lumber, a major competitor, sidestepped bankruptcy by handing over virtually all its assets to its bondholders. By contrast, Louisiana-Pacific’s balance sheet is sound, with just $84 million in net debt—20% of total capital.

Things could soon start looking up, but whether that means next quarter or next year is hard to guess. For one thing, 20% of the capacity in the industry has been idled, taking pressure off pricing. OSB currently sells for around $200 per 1,000 square feet, up from $111 in January. That’s a welcome lift given that the cost of produce it is around $175. For another, OSB continues to gain favor among builders; in 2007 it comprised 62% of the structural panel market and could climb to 75% by 2011. “This is more than just a play on a recovery,” says Jeff Tyburski, a senior analyst covering basic materials at Manning & Napier. Manning & Napier is Louisiana-Pacific’s largest shareholder, with 12% of the stock.

Last year the company lost $180 million, or $1.50 a share, on revenue of $1.7 billion. The Street expects losses to edge up to $1.53 a share this year before beginning to narrow in 2009. To help weather the current storm, Louisiana-Pacific is expected to suspend its dividend, saving the company $15 million a quarter. For investors, this wouldn’t be such a bad thing. The last time the company suspended its dividend, in November 2001, the stock rallied sharply.

Tyburski thinks Louisiana-Pacific could earn $3 a share at the peak of the next cycle, which could be three-to-five years out. (The company earned $4.36 a share in 2005.) “You don’t have to put much of a multiple on that to get to $28 a share,” he says, adding that the stock should gain ground quickly once recovery is in sight.

Catching the bottom on a stock like this is more a matter of luck than skill. Making money on the recovery, however, is just a matter of patience.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com